In their third estimate of the US GDP for the first quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was contracting at a -2.94% annualized rate. When compared to prior quarters, the new measurement is down nearly 5.6% from the 2.64% growth rate reported for the 4th quarter of 2013, and it is now more than 7% lower than the 4.19% reported for the 3rd quarter of 2013 -- and it is by far the worse quarter since 2009.

The largest revisions to the headline number were from consumer services (revised downward by -1.26%) and exports (down -0.42%). Unfortunately, nearly everything was revised downward : consumer spending on goods (-0.12%), inventories (-0.08% more) and imports (down an additional -0.17%). Only governmental spending and fixed investments escaped yet further downward revisions -- although both of those categories remain mired deeply in the red.

The previously reported quarterly growth in real annualized per-capita disposable income was revised downward yet again to $78 (and that disposable income figure is now $244 per year lower than it was during the fourth quarter of 2012).

And lastly, for this report the BEA assumed annualized net aggregate inflation of 1.27%. During the first quarter (i.e., from January through March) the growth rate of the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was over a half percent higher at a 1.80% (annualized) rate, and the price index reported by the Billion Prices Project (BPP -- which arguably reflected the real experiences of American households while recording sharply increasing consumer prices during the first quarter) was over two and a half percent higher at 3.91%. Under reported inflation will result in overly optimistic growth data, and if the BEA's numbers were corrected for inflation using the BLS CPI-U the economy would be reported to be contracting at a -3.51% annualized rate. If we were to use the BPP data to adjust for inflation, the first quarter's contraction rate would have been an horrific -5.62%.

Among the notable items in the report :

-- The contribution of consumer expenditures for goods to the headline number dropped to a stagnant 0.04% (down a substantial -0.62% from the 0.66% contribution in the prior quarter).

-- The contribution made by consumer services spending plunged to 0.67% (down -0.90% from the 1.57% in the prior quarter). This revision totally reversed the BEA's previous measurement of a sharp increase in non-discretionary healthcare expenses -- and as such it presents a somewhat murkier (and less negative) picture of the ongoing real economic impact of ObamaCare.

-- The previously reported contraction in commercial private fixed investments was confirmed, reducing the headline number by -0.27% (after adding 0.43% during the prior quarter). The contraction was led by reduced outlays for IT equipment, transportation equipment and residential construction.

-- The contraction in inventories was somewhat worse than previously reported -- subtracting -1.70% from the headline growth rate (down -1.68% from the prior quarter).

-- Exports are now reported to be subtracting -1.25% from the headline number (a change of -2.48% from the fourth quarter).

-- Imports subtracted -0.29% from the headline number (roughly the same as the -0.24% in the prior quarter).

-- The annualized growth rate for the "real final sales of domestic product" dropped into contraction: -1.24% (now down 3.9% from the 2.66% in the prior quarter). This is the BEA's "bottom line" measurement of the economy, and this is the first time it has contracted since the first quarter of 2011.

-- And as mentioned above, real per-capita annual disposable income grew by $78 during the quarter (a 0.85% annualized rate). But that number is down a material -$244 per year from the fourth quarter of 2012 (before the FICA rates normalized) and it is up only about 1% in total ($342 per year) since the second quarter of 2008 -- some 23 quarters ago.

The Numbers, As Revised

As a quick reminder, the classic definition of the GDP can be summarized with the following equation :

In the new report the values for that equation (total dollars, percentage of the total GDP, and contribution to the final percentage growth number) are as follows :

GDP Components Table

Total GDP

=

C

+

I

+

G

+

(X-M)

Annual $ (trillions)

$17.0

=

$11.7

+

$2.7

+

$3.1

+

$-0.5

% of GDP

100.0%

=

68.9%

+

15.8%

+

18.3%

+

-3.1%

Contribution to GDP Growth %

-2.94%

=

0.71%

+

-1.97%

+

-0.14%

+

-1.54%

The quarter-to-quarter changes in the contributions that various components make to the overall GDP can be best understood from the table below, which breaks out the component contributions in more detail and over time. In the table below we have split the "C" component into goods and services, split the "I" component into fixed investment and inventories, separated exports from imports, added a line for the BEA's "Real Final Sales of Domestic Product" and listed the quarters in columns with the most current to the left :

Quarterly Changes in % Contributions to GDP

1Q-2014

4Q-2013

3Q-2013

2Q-2013

1Q-2013

4Q-2012

3Q-2012

2Q-2012

1Q-2012

4Q-2011

3Q-2011

2Q-2011

1Q-2011

Total GDP Growth

-2.94%

2.64%

4.12%

2.48%

1.14%

0.14%

2.78%

1.20%

3.71%

4.86%

1.37%

3.19%

-1.29%

Consumer Goods

0.04%

0.66%

1.03%

0.71%

0.85%

0.85%

0.84%

0.50%

1.04%

1.14%

0.29%

0.05%

0.60%

Consumer Services

0.67%

1.57%

0.32%

0.53%

0.69%

0.29%

0.31%

0.78%

0.94%

0.51%

1.14%

0.98%

0.81%

Fixed Investment

-0.27%

0.43%

0.89%

0.96%

-0.23%

1.63%

0.39%

0.68%

1.21%

1.39%

1.96%

1.16%

-0.05%

Inventories

-1.70%

-0.02%

1.67%

0.41%

0.93%

-2.00%

0.60%

-0.91%

0.36%

2.73%

-1.60%

0.72%

-1.06%

Government

-0.14%

-0.99%

0.08%

-0.07%

-0.82%

-1.31%

0.67%

0.05%

-0.28%

-0.31%

-0.52%

-0.25%

-1.61%

Exports

-1.25%

1.23%

0.52%

1.04%

-0.18%

0.15%

0.05%

0.51%

0.56%

0.38%

0.92%

0.64%

0.48%

Imports

-0.29%

-0.24%

-0.39%

-1.10%

-0.10%

0.53%

-0.08%

-0.41%

-0.12%

-0.98%

-0.82%

-0.11%

-0.46%

Real Final Sales

-1.24%

2.66%

2.45%

2.07%

0.21%

2.14%

2.18%

2.11%

3.35%

2.13%

2.97%

2.47%

-0.23%

Summary and Commentary

Let's take a look at both the good news and the bad news in this report :

The Good News

-- The BEA totally reversed itself on the household savings rate, which is now reported to have increased (slightly) during the quarter (to 4.4% from 4.3% in 4Q-2013) after two previous estimates of declining savings. This improved savings rate is consistent with the downward revision in consumer spending, and it will be used by the "bad weather" apologists as confirmation that the plunging economic activity was due to a particularly harsh winter -- with the increasing savings yet another sign of the "pent-up demand" that is even now quickly reversing a one-off quarterly blip.

As Ms. Yellen explained to us only last week : "Although real GDP declined in the first quarter, this decline appears to have resulted mainly from transitory factors ... Economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter ... "

-- Ms. Yellen went on to say : "Private domestic final demand -- that is, spending by domestic households and businesses -- continued to expand in the first quarter ..."

While that was technically correct, it was arguably a case of semantics and cherry-picking positive lines from the economic reports. Her preferred measurement conveniently omitted inventories, government expenditures, exports and imports -- all of which were negative. By doing so she calculated a new "private domestic final demand" benchmark that is growing -- albeit at an anemic 0.44%. Meanwhile the BEA's "bottom line" real final sales of domestic product was contracting at a -1.24% annual rate during the first quarter of 2014.

The Bad News

Nearly everything else :

-- We might hope that the "bad weather" theorists will note that the sharp downward revision to consumer services spending occurred almost exclusively in non-discretionary healthcare expenditures, which is difficult to blame on a harsh winter -- especially since discretionary recreational spending during that same storm plagued time span was actually revised upward and remained essentially neutral.

-- The slightly improved 4.4% household savings rate is still a half percent lower than the 4.9% savings rate measured during the 3rd quarter of 2013, let alone the 6.6% rate achieved during the 4th quarter of 2012.

-- The "bad weather" spin-meisters need to explain how a harsh winter caused exports to plunge -- resulting in a roughly -2.5% change in the headline number relative to the prior quarter. Export growth had been one of the bright spots of 2013 -- even as the economies of many of our trading partners softened. That source of growth has ended, bad weather or not.

-- Consumer spending is contributing roughly 1.5% less to the headline annualized growth number than during 4Q-2013.

-- The growth contribution from fixed commercial investment is down .7% from 4Q-2013, and down roughly 1.2% from 3Q-2013.

-- Governmental spending continues to contract.

-- Inventories continue to contract.

-- Per-capita real disposable income is increasing at a miserable 0.85% annual rate. Note that those per-capita numbers report the mean, and are pushed up by gains among the super wealthy. Surveys of median household disposable income are actually showing continued contraction.

-- The numbers are likely boosted by low "deflators" and are almost certainly more positive than households are actually experiencing. Using a "deflator" that is closer to real household experiences (e.g., the Billion Prices Project) results in a horrific contraction rate of -5.62%.

-- Looking at the past three quarters for trend lines, we see growth rates of +4.12% (3Q-2013), +2.64% (4Q-2013) and now -2.94% (1Q-2014). The trend line is not only down, it is clearly getting worse.

Yet Ms. Yellen tells us not to worry : "Economic activity is rebounding in the current quarter." We certainly hope so, with "pent-up demand" quickly reversing a one-off blip of a quarter that is frighteningly reminiscent of 2008-2009.

But Ms. Yellen's assurances are interesting for yet another reason. In roughly a month we will know if she is remotely correct. If she is not, we will have to choose whether she is guilty of merely spinning happy bubble talk or is basing Fed policy on badly misinformed or untimely economic data. Frankly, we would much prefer the former.